Behavioral Finance

Dreams and Goals

Would you prefer to be asked about your dreams or your goals?

Last week in one of our Wealth Mentor Community Calls we discussed this very question. Prior to the meeting, I had the Wealth Mentor participants read a book called the Dream Manager by Matthew Kelly. This book really brings out the connective power of encouraging people to get in touch with their dreams.

The point that emerged during the discussion was that most people would prefer to be asked about their dreams rather than goals. The word dreams is softer and has greater resonance for most people. Also, the concept of dreams is less restrictive and more free-flowing. Goals are perceived more as actions and objectives that need to be defined and measured. People often associate “SMART” with goals – specific, measurable, actionable, realistic and time based.

Kelly also brings out in his book how important dreams are to building your relationship with money as they are fundamental to who you are. He really emphasizes how life and financial decisions are totally integrated. Therefore, getting in touch with your dreams is fundamental to building both your life and wealth.

In a nutshell, if you want to open your client up to what they really want in their financial life then consider firstly asking them about their dreams. The goals can be discussed and worked out later. They will usually come from the dreams. You may find that this is also more fun which also helps build the trust.

No harm could be done by getting your clients to read the Dream Manager. Even if all you do is ask your clients to write down a big list of dreams then you are off to a great start in discovering who they are and building a great relationship. Imagine the possibilities when you get couples doing this or what could happen in a family meeting?

Managing Risk

On the weekend, I had the great fortune to listen to a very inspiring presentation by Dr. Ben Carson. Dr. Carson is a leading pediatric neurosurgeon at the John Hopkins Hospital. In his career he has been a pioneer in performing highly risky surgery on children. He has a great book: “Take the Risk – Learning to Identify, Choose and Live with Acceptable Risk”.

Dr. Carson explained how he has often been faced with addressing the viability of taking a major risk in his work. What is there to gain? Will it be worthwhile? What if I fail? He made the insightful comment that if no one took a risk then today there would be no airplanes or cars or other technologies. Society always benefits from someone taking risks as lessons can be learned.

Is ducking risk the most productive way to live? Nothing will be achieved without taking risks. However, nothing will be achieved by taking inappropriate risks. The question then becomes what is an acceptable risk? In this regard, what is an acceptable risk to people will be different because we are all unique. Dr. Carson says you need to build your risk analysis model based on who you are, your values and also your learning style.

All of the principles Dr. Carson states can be equally applied to determining your financial risk tolerance and how you make financial decisions. The quality of life you build for yourself will be somewhat dependent on the risks you take. Ultimately, what is an acceptable financial risk will come down to your relationship to money. Further you and your partner need to check your “couple compatibility” index so that the risks taken are acceptable to both of you.

Review Your Relationship with Money

Recently, I have had a great experience in reading a book called The Energy of Money by Maria Nemeth. I would thoroughly recommend this book to any person who is interested in better understanding their relationship to money. After all, this is what I have been advocating very strongly in my past few blogs. To become financially educated and realize your potential, you need to understand who you are and why you make the life and financial decisions that you do.

Maria’s book is very consistent with the philosophy that we have at Financial DNA that life and money decisions are totally integrated and interdependent. Related to this point Maria explains very well how ultimately, your success comes down to how you handle energy. The only difference is that Financial DNA goes one step further and provides a robust and University validated system to measure your energy based on profiling who you are.

In the book, Maria says that: “Our relationship with money is a metaphor for our relationship with all forms of energy: time, physical, vitality, enjoyment, creativity and support of friends”. She then goes on to explain that these energies are what empower our lives. Without any one of them our life becomes difficult. Each is interdependent. Your success and comfort with money will be echoed through all of these areas. Maria says that when you learn to use money energy, you can learn to use any form of energy with ease. Our process starts with a Quality Life Review so that we can see which of these areas you are currently strong in and those which are a struggle and need further development. This process is key to successful financial planning because it is sending a message of where potentially your energy is and where it needs to be.

Also, related to all of this we need to be clear about what is meant by “successful” people. This is not just about financial success. Maria defines successful people as those who have succeeded in using money to realize their hearts’ desires as well as people who have used money to become comfortable or wealthy personally and professionally.

Think about your own definition of success and your energy. How does that relate to money?

Financial Education in Turbulent Times

My last couple of blogs have really hit on the issue of financial education to develop greater financial capability for the consumer. Why am I harping on it more? Yes, it is my passion and the core of why Financial DNA was developed. However, the need is now “red hot” with the financial markets in turbulence and many people very concerned about how they will unwind. Are we at the lows yet? It would not seem likely. So, there is potential for a lot more concern and emotion yet.

The question becomes how will you behave in these turbulent times? What decisions will you make? How will you make them?

Every one has emotions. Further, nothing more than money can trigger your emotions and cause you to make irrational decisions. The key is to have greater self understanding of your emotions and propensities to making financial decisions. Also, it is important that you stay focused on your life purpose. This may sound lofty and big picture. However, your life purpose is the foundation of your goals and your wealth creation strategies. I have always seen that those who stay focused on their life purpose are the ones who make it through turbulent times and manage their emotions.

Remember that 5% of your wealth will come from investments and 95% from your behavior. So, understanding your behavior will get the results in the end.

So, what is the next step? Get more of the right financial education and become financially literate. The focus of this education should clearly be to become more educated about who you are and your life purpose. The Financial DNA purpose and that of our Wealth Mentors is to provide you with this education. Ultimately if you are interested in preserving your wealth in turbulent times then this is the best strategy out there.

Knowing Self Increases Financial Capability

Core to my passion is seeing people take more personal responsibility for their financial decisions. In the end this is actually key to your financial success, and overall quality life. To take more personal responsibility means increasing your financial capability. I believe there is an obligation on yourself to get the right financial education and also on your financial advisors to help you by providing it and guiding you. In the end, you need to be able to make more informed choices about the products and solutions you are buying, and not just rely on others to decide for you.

At the moment the regulators in the countries which lead financial planning such as the USA, Australia, the Netherlands, Singapore and Ireland are pushing the consumer financial capability point hard. Just recently, the Irish Financial Regulator released a “Preliminary Report on Financial Capability in Ireland June 2008″ based on extensive consumer research.

The key point that is coming out of the Irish report is that you as the consumer must develop your skills, knowledge, attitudes and behavior. To me this goes to the very core of the Financial DNA Discovery Process. To educate you about your financial behavior and to provide a framework for your financial advisor to guide you. What you will find is that when you go through Financial DNA the increased knowledge and emotional comfort will make you more confident in the decisions made. As you make better decisions success will build more success.

There is interesting research from the University of San Diego which says: 5% of your wealth comes from investments and 95% from your behavior. So what should be the core of your financial education? Learning more about products or yourself?

If you would like to see what you can learn about your financial behavior then click here. Also, you can participate in Financial DNA by clicking here.

Birth Order and Behavior

One of the questions I am often asked is does birth order influence your behavioral style?

Well, based on the research we have performed, birth order does not influence your natural behavior. When I say natural behavior, I mean the core “hard-wired” behavior which is based on genetics and then shaped into you up to 3 years old. The natural behavior changes very little throughout your life. Understanding the influence of natural behavior is important because it is very influential on your life motivations and hence how you make decisions.

In some families you see the eldest child being the more dominant, independent, and risk taker type with the youngest being the more engaging and harmonious type. Then, in another family with the same number of children it is exactly the reverse. There is no trend either way. Further, you cannot predict which child will be more successful. The same is true of single children families. The only child could have any type of behavioral style across the full spectrum – dominant, harmonious, risk takers and creative. Generally, when there are 2 or 3 children in the family they will be very different. However, when there are 4 or more children then you may have 2 who are quite similar, yet they will still be unique.

What I would say is that the birth order could nevertheless influence some aspects of the longer term personality development which takes place after the age of 3 years. This will be because as children are born circumstances or environments in that family change and the opportunities are different for each of them. In some cases, the presence or influence of one or both parents may differ. For instance, I have seen a bankruptcy in a family have a great impact on the 2 eldest born because they had a lot taken away from them whereas the youngest 2 children hardly lived through it. Similarly, the death or serious illness of a parent could have a different influence on the eldest and youngest children. Or even a divorce. Also, there can be other factors such as the way in which one parent connects with one of the children e.g., the father with the eldest daughter or mother with the youngest son. So, what I am saying is that these types of factors are all an influence on personality and the birth order could matter. The influences on the personality development are much more specific situation driven.

Overall, I would say it is difficult to make definitive predictions of personality based on birth order. This is particularly because evidence shows the core natural behaviors which are foundational to personality development do not relate to birth order. It is difficult to say that the eldest child will always behave a certain way, then the middle children and the youngest child will also behave a certain way. The make-up of every family and the circumstances each lives through are different. That is as far as it goes. Therefore, there are no rules which generally apply.